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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ________________
Commission file number 1-13647
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DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 73-1356520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5330 East 31st Street, Tulsa, Oklahoma 74135
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (918) 660-7700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 1, 1999 was $192,975,696.
The number of shares outstanding of the registrant's Common Stock as of
March 1, 1999 was 24,125,941.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 27, 1999, are incorporated by reference in Part
III.
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2
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-K
CONTENTS
Page
PART I ----
ITEM 1. BUSINESS.....................................................4
ITEM 2. PROPERTIES..................................................21
ITEM 3. LEGAL PROCEEDINGS...........................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.............................22
ITEM 6. SELECTED FINANCIAL DATA.....................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...........................................34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE......................60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........60
ITEM 11. EXECUTIVE COMPENSATION.....................................60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............60
3
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K........................................60
SIGNATURES....................................................................65
INDEX TO EXHIBITS.............................................................66
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Some of the statements contained herein under "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Although Dollar Thrifty Automotive
Group, Inc. believes such forward-looking statements are based on reasonable
assumptions, such statements are not guarantees of future performance and
certain factors could cause results to differ materially from current
expectations. These factors include: economic and competitive conditions in
markets and countries where our customers reside and where our companies and
their franchisees operate; changes in capital availability or cost; costs and
other terms related to the acquisition and disposition of automobiles; the
ability of Dollar Thrifty Automotive Group, Inc. and its third party providers,
vendors, suppliers and independent franchisees to adequately address the Year
2000 issue; and certain regulatory and environmental matters. Should one or more
of these risks or uncertainties, among others, materialize, actual results could
vary materially from those estimated, anticipated or projected. Dollar Thrifty
Automotive Group, Inc. undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
4
PART I
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ITEM 1. BUSINESS
COMPANY OVERVIEW
Dollar Thrifty Automotive Group, Inc., a Delaware corporation (the
"Company"), owns two vehicle rental companies, Dollar Rent A Car Systems, Inc.
("Dollar"), and Thrifty Rent-A-Car System, Inc. Thrifty Rent-A-Car System, Inc.
is an indirect subsidiary of the Company as it is a wholly owned subsidiary of
Thrifty, Inc. (Thrifty, Inc., Thrifty Rent-A-Car System, Inc. and all their
respective subsidiaries are individually or collectively, as the context
requires, referred to hereafter as "Thrifty"). Dollar and Thrifty and their
independent franchisees operate the Dollar and Thrifty vehicle rental systems.
The Dollar and Thrifty brands represent a value-priced rental vehicle generally
appealing to leisure customers and tourists, including foreign tourists and to
small businesses and independent business travelers. As of December 31, 1998,
Dollar and Thrifty had 902 locations in the United States and Canada of which
139 were company-owned stores and 763 were locations operated by franchisees.
While Dollar and Thrifty have franchisees in countries outside the United States
and Canada, revenues from these franchisees have not been material to results of
operations of the Company and its consolidated subsidiaries (collectively, the
"Group"). Dollar's gross revenues comprise approximately 73% of the Group's
revenues with Thrifty contributing the remaining 27% of revenues.
The businesses of Dollar and Thrifty complement each other, although they
have different approaches to the vehicle rental market. In the United States,
Dollar's main focus is operating company-owned stores located at major airports,
and it derives substantial revenues from tour and leisure rentals. Thrifty
operates almost exclusively through franchisees serving both the airport and
local markets. Dollar derives a majority of its U.S. revenues from providing
rental vehicles and services directly to rental customers, while Thrifty derives
its revenues primarily from franchising fees and services including vehicle
leasing. Thrifty's U.S. franchisees provide vehicles and services to the rental
customer except in two cities where Thrifty operates company-owned stores.
Dollar incurs the costs of operating its company-owned stores and its revenues
are directly affected by changes in rental demand. As Thrifty operates primarily
through franchisees, it does not incur the costs of operating the franchised
locations and does not generally deal directly with rental customers. Therefore,
changes in levels of customer demand tend to affect Thrifty's results less
quickly than those of Dollar. See Note 14 of Notes to Consolidated Financial
Statements for business segment information.
The Company was incorporated on November 4, 1997. It is the successor to
Pentastar Transportation Group, Inc. which was formed in 1989 to acquire and
operate the rental car subsidiaries of Chrysler Corporation, now known as
DaimlerChrysler Corporation ("DaimlerChrysler"). Dollar was incorporated in 1965
and Thrifty was incorporated in 1950. Thrifty is an indirect subsidiary of the
Company. Thrifty, Inc., which was formed in December 1998, directly owns Thrifty
and Thrifty Car Sales, Inc., which principally franchises used vehicle sales.
The Company sold its wholly owned subsidiary, Snappy Car Rental, Inc. ("Snappy")
in 1994.
On December 23, 1997, the Company completed its initial public offering of
Common Stock after registration with the Securities and Exchange Commission
("SEC") on Form S-1 (the "Offering"). Upon closing of the Offering, 22,500,000
shares of Common Stock were sold at an initial price to the public of $20.50 per
share. In addition, the underwriters exercised an over allotment option and
acquired an additional 1,125,000 shares for the same price, less the applicable
underwriter's discount. Of the shares sold in the Offering, 20,000,000 shares
were sold by DaimlerChrysler, which prior to the Offering was the parent of the
Company, and 3,625,000 shares were sold by the Company. On January 15, 1998, the
underwriters exercised a second and final portion of their over allotment
option, purchasing an additional 498,105 shares of Common Stock.
In order to close the offering of Common Stock, it was also necessary for
the Company to complete new financing arrangements. On December 23, 1997, the
Company closed a $900 million asset backed medium term note program, together
with a Revolving Credit Facility (hereinafter defined). In addition, on March 4,
1998, the Company established a $615 million Commercial Paper Program
(hereinafter defined) backed by a Liquidity Facility (hereinafter defined).
Proceeds of the medium term notes and commercial paper were used and will be
used to finance existing vehicles and the acquisition of new vehicles. The
Revolving Credit Facility was established to provide letters of credit to
enhance these vehicle financing programs and to meet the Group's borrowing needs
for its other business operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
5
INDUSTRY OVERVIEW
The U.S. daily vehicle rental industry has two principal markets: the
airport market and the local market. Vehicle rental companies that focus on the
airport market rent primarily to business and leisure travelers. Vehicle rentals
from airport locations account for the largest portion of vehicle rentals in the
United States. Companies focusing on the local market rent primarily to persons
who need a vehicle periodically for personal or business use or who require a
temporary replacement vehicle. Rental companies also sell used vehicles and
ancillary products such as refueling services and loss damage waivers.
Vehicle rental companies typically incur substantial debt to finance the
ongoing turnover of their rental fleets. They also typically acquire a majority
of their fleets under manufacturer residual value programs that guarantee the
resale value of Program Vehicles (hereinafter defined) at particular times in
the future. This allows a rental company to predict this important element of
its cost structure. The Program Vehicles and the related obligations of the
manufacturers are used as collateral for fleet financing.
The domestic vehicle rental industry has experienced significant revenue
growth over the past five years, following a period of reduced rental rates
prompted by excess vehicle capacity. The economic recession in the United States
from earlier this decade led to decreased new vehicle demand and overcapacity
among automotive manufacturers. The manufacturers offered significant purchase
incentives to vehicle rental companies, enabling them to significantly expand
the size of their fleets. This eventually resulted in excess capacity,
intensified competition and depressed rental rates. As general economic
conditions in the United States improved, the manufacturers increased their new
vehicle prices and substantially reduced the incentives offered to fleet
purchasers. Continued competitive pressure within the rental industry, however,
constrained increases in average daily rental rates. The domestic vehicle rental
industry is now experiencing improved profitability resulting from increased
transaction volumes, higher average daily rental rates and favorable cost
trends.
There have recently been significant changes in the ownership of the
principal companies in the U.S. vehicle rental industry, several of which had
been owned by domestic automotive manufacturers. Cendant Corporation purchased
Avis Rent A Car, Inc. and subsequently sold 70% of Avis to the public. Republic
Industries Inc. acquired National Car Rental System, Inc. and Alamo Rent-a-Car,
Inc., and Team Rental Group Inc. (renamed Budget Group, Inc.) acquired Budget
Rent a Car Corporation from Ford Motor Company ("Ford"). Ford sold a minority
interest in The Hertz Corporation to the public. Accordingly, most of the major
companies in the industry are now publicly held, including the Company. The
Company believes these changes should lead to improved operating results as a
result of increased industry focus on profitability and shareholder returns,
rather than on transaction volume and market share.
SEASONALITY
The third quarter, during the peak summer travel months, has historically
been the strongest quarter of the year in terms of number of vehicle rentals,
rental rates and Group profitability. In 1998, the Group's average monthly fleet
size ranged from a low of approximately 81,000 vehicles in the first quarter of
1998 to a high of approximately 106,000 vehicles in the third quarter of 1998.
Travel disruptions during the summer period could have a material adverse effect
on the Group.
DOLLAR
GENERAL
Dollar's main focus is serving the airport vehicle rental market, which is
composed of business and leisure air travelers. The majority of its locations
are on or near airport facilities. Dollar operates primarily through
company-owned stores in the United States, and also licenses to independent
franchisees to operate as a part of the Dollar system in the United States and
abroad. All of its Canadian and international operations are franchised.
6
Dollar's services and products include fleet leasing, marketing,
centralized reservations, counter automation, insurance, central billing,
supplies and training and operational support. Dollar's company-owned stores and
franchisees rent vehicles on a daily, weekend, weekly and monthly basis, at
varying rates depending on cost and other competitive factors in each location's
market. In addition to vehicle rentals, Dollar and its franchisees sell
ancillary products and rent supplemental equipment. To meet seasonal and other
demand changes, Dollar shifts vehicles among its company-owned stores and U.S.
franchisees. Revenues from Dollar's franchisees outside the United States and
Canada have not been material to its results of operations.
As of December 31, 1998, Dollar's vehicle rental system included 268
locations in the United States and Canada, consisting of 114 company-owned
stores and 154 that were operated by franchisees. Dollar's total revenue was
$659.7 million in 1998, of which $603.3 million (91.5%) was generated by
company-owned stores and $56.4 million (8.5%) was revenue from Dollar
franchisees for vehicle leasing fees and other service and product fees and
other revenue.
Dollar operates primarily through company-owned stores, and through
franchisees in key U.S. leisure destinations and in other U.S. locations. Dollar
has company-owned stores in 37 of the 50 largest U.S. airport markets and
franchisees in the remaining 13 locations. When opportunities arise, Dollar may
acquire operations from franchisees and convert them to company-owned stores.
Dollar converted one franchised operation to a company-owned operation in 1994,
two in 1995, four in 1996 and three in 1997. Dollar acquired two franchised
operations in 1998. In March 1998, it acquired the operations of its San Diego
franchisee, and in October 1998, it acquired the operations of its Phoenix
franchisee. Dollar generally has rights of first refusal on the sale of a
franchised operation. Dollar also opened a new corporate store in Columbus, Ohio
in May 1998.
Dollar sold its company-owned store in Colorado Springs in October 1998,
including a license to operate Aspen, Grand Junction and Gunnison, Colorado.
This transaction was consistent with Dollar's strategy to license markets of
this size in order to grow the Dollar system.
COMPANY-OWNED STORES
Dollar believes that having company-owned stores in most of the largest 50
airport markets and other key markets enhances its ability to manage its vehicle
rental system and fleet. Dollar can implement marketing and pricing strategies
to focus on discretionary leisure and business travelers, reduce costs through
bulk purchasing, apply performance benchmarks and develop and implement best
practice management techniques nationwide. Its company-owned store network also
allows Dollar to offer customers one-way rentals in certain markets.
Vehicle rentals by customers of foreign and U.S. tour operators generated
approximately 35% of Dollar's rental revenues in 1998. These rentals are usually
part of tour packages that also include air travel and hotel accommodations.
Rentals to tour customers have certain advantages. Tour customers tend to
reserve vehicles earlier than other customers, rent them for longer periods and
cancel reservations less frequently. Dollar has significant relationships with
foreign and domestic tour operators that resulted in rental revenue of $211.7
million in 1998.
Dollar is the exclusive U.S. vehicle rental company for three of its five
largest tour operator accounts. Its arrangement with the other two tour operator
accounts is non-exclusive. The agreements for these five accounts expire from
December 31, 1999 to October 31, 2007. No single tour operator account generated
in excess of 5% of the Group's 1998 revenues.
As of December 31, 1998, Dollar had vehicle rental concessions for
company-owned stores at 58 airports in the United States. Its payments for these
concessions are usually based upon a specified percentage of airport-generated
revenue, subject to a minimum annual fee, and sometimes include fixed rent for
terminal counters or other leased properties and facilities.
7
SERVICES AND PRODUCTS PROVIDED TO RENTAL CUSTOMERS
Worldwide Reservation System. Dollar has continuously staffed reservation
facilities at its headquarters in Tulsa, Oklahoma and in its newly opened
reservation facility in Tahlequah, Oklahoma. All of Dollar's current reservation
facilities, as well as the major U.S. airline global distribution systems, are
linked to Dollar's worldwide reservation computer and telecommunications system,
which is also located in Tulsa, Oklahoma. Dollar's reservation facilities
processed 7.2 million reservation telephone calls during 1998. Approximately 49%
of Dollar's 1998 non-tour vehicle rentals were booked by travel agents through
airline distribution systems. Dollar has preferred supplier agreements with many
major travel agency chains and travel consortia. Reservations to Dollar's
Internet web site increased significantly in 1998.
Supplemental Equipment and Optional Products. Dollar rents ski racks,
mobile telephones, baby seats and other supplemental equipment and, subject to
availability and applicable local law, makes available loss damage waivers and
insurance.
Instant Return. Dollar offers customers instant return service at most of
its U.S. airport company-owned stores. When a customer returns a vehicle at one
of these locations, a representative meets the customer and provides a receipt
from a hand-held computer terminal.
INFORMATION SYSTEMS
Dollar depends upon a number of core information systems to operate its
business. Its worldwide reservation system has rate management applications. The
counter automation system in Dollar's company-owned stores facilitates the sale
of additional products and services and allows Dollar to monitor its fleet and
financial assets. Dollar completed the nationwide introduction in company-owned
stores of Dollar's new rental counter automation system, FASTLANE, in 1998,
except for Hawaii, which will be completed in 1999, and Florida, which will be
completed in 2000. FASTLANE is currently being adapted to serve Dollar's tour
customers. In 1998, Dollar developed a revenue management system with Talus, a
leading supplier of such systems, which was introduced in Dollar's company-owned
stores except Florida and Hawaii, which will occur in 1999. The initial version
of this system is being designed to enable Dollar to better determine rental
demand based on historical reservation patterns and adjust its rental rates
accordingly. Dollar has entered into an agreement with The SABRE Group, Inc.
("SABRE"), a leader in electronic distribution systems for the travel industry,
to manage and monitor its data center network and its daily information
processing.
Dollar's core information systems are either designed to, or are being
updated to, address the Year 2000 issues as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000." All of Dollar's key systems are housed in a secure underground SABRE
facility in Oklahoma designed to withstand disasters.
CUSTOMER SERVICE AND EMPLOYEE TRAINING
Dollar has programs at its headquarters and in company-owned stores to
improve customer service. Customer First!, Dollar's quality improvement program,
involves establishing a team at each vehicle rental location that is accountable
for customer satisfaction. Dollar's customer service center measures customer
satisfaction, tracks service quality trends, handles customer complaints and
provides recommendations to Dollar's senior management and vehicle rental
location supervisors. Dollar conducts initial and ongoing training for
company-owned store and franchisee employees through education centers in San
Francisco, Tulsa and Newark. Dollar opened additional training centers in
Denver, Los Angeles and Cleveland in 1998.
ORLANDO OPERATIONS
Central Florida, with its many tourist attractions, is the most important
leisure destination for Dollar. Dollar's company-owned store at Orlando
International Airport has a mix of tour and other business. Dollar also operates
a facility at the Orlando Sanford International Airport, 25 miles north of
Orlando, which mainly serves charter flights by foreign tour operators. This
facility, which was specifically designed to handle tour customers, has 42
rental stations and parking for approximately 1,600 vehicles.
8
FRANCHISING
United States and Canada
Approximately 8% of Dollar's 1998 revenues in the United States and Canada
consisted of leasing revenue and fees from its franchisees and other revenues.
Dollar sells its U.S. franchises on an exclusive basis for specific geographic
areas. Most franchisees are located at or near airports that generate a lower
volume of vehicle rentals than the airports served by Dollar's company-owned
stores. Dollar also makes a fleet leasing program available to its U.S.
franchisees, which in 1998 accounted for approximately 5% of Dollar's total
revenue. See "-- Fleet Acquisition and Management -- Fleet Leasing Programs."
Dollar licenses its franchisees to use Dollar's service marks in the
vehicle rental and leasing, parking and used car sales businesses. Franchisees
pay Dollar an initial franchise fee generally based on the population, number of
airline passengers, total airport vehicle rental revenues and the level of any
other vehicle rental activity in the franchised territory, as well as other
factors.
System Fees. In addition to an initial franchise fee, in 1999 each U.S.
franchisee is generally required to pay Dollar a system fee on their rental car
revenue equal to 8% of gross rental revenue on a monthly basis for airport
operations (7% in 1998 and 6% in 1997) and 6% for suburban operations.
Franchisee Services and Products. Dollar makes insurance coverage
available to its franchisees and provides them with training and operational
assistance, site selection guidance, vehicle damage recovery and claims
management advice, sales assistance and image and standards guidance. Dollar
also provides them with fleet planning and customer satisfaction programs and
sells them certain Dollar-branded supplies. In addition, Dollar offers its
franchisees rental rate management analysis and programs under which Dollar
handles warranty claims processing, corporate account and tour billing and
travel agent commission payments. Dollar franchisees are connected to, and pay
Dollar a fee for, each reservation made through Dollar's worldwide reservation
system.
International
Dollar's vehicle rental locations outside the United States are operated
by master franchisees, direct franchisees and subfranchisees. Master franchisees
are authorized to use Dollar's service marks and business methods in territories
in which they operate directly or through subfranchisees, and are responsible
for promoting the Dollar brand name and its services and products and for
developing and supporting their direct operations and subfranchisees. Dollar's
revenues from international franchise operations were less than 1% of 1998 total
revenue.
As of December 31, 1998, Dollar had franchised operations located in 27
countries. In Canada, Dollar's master franchisee directly operates or
subfranchises 27 airport and suburban locations. In December 1997, Dollar
entered into a reservation transfer agreement with Europcar International, S.A.,
a European-based vehicle rental company ("Europcar"), which became effective
February 1, 1998. Dollar and Europcar have announced that this agreement will
terminate on February 29, 2000. The interim period will allow each of the
companies to develop solutions more adapted to their respective segments in
leisure and business and their respective long-term strategies. Until the end of
this agreement, the parties will continue to cooperate to maintain the best
service to their transatlantic customers.
Although the agreement with Europcar requires each party to display the
trademarks or service marks of the other company at their own locations, such
locations remain autonomous and under control of the company which established
the location. Accordingly, the number of foreign locations or Dollar system-wide
locations disclosed in this report do not include Europcar locations where
Dollar trademarks or service marks may appear.
Effective March 1, 2000, Dollar has agreed to begin exchanging European
and U.S. reservations with Sixt, AG, a major European rental car company.
9
MARKETING
National Advertising and Promotion
Dollar's primary marketing objective is to convey to cost conscious
leisure and business travelers that Dollar is committed to providing
lower-priced vehicle rentals than its competitors. Dollar also emphasizes its
operations in Florida, California, Hawaii and Nevada, where Dollar has a higher
share of the leisure rental market than in other locations. Dollar's national
advertising programs build on these themes through weekly advertisements in U.S.
Sunday newspaper travel sections and weekly advertisements in USA Today. Dollar
also advertises on U.S. broadcast and cable television networks, promoting its
low rates and on-airport convenience. Dollar spends approximately 5% of its
annual total U.S. system-wide revenues on marketing, advertising, public
relations and sales promotions. Dollar has national marketing partnerships with
major U.S. airlines' frequent flier programs in order to attract customers who
value frequent flier awards as well as low vehicle rental rates.
Dollar encourages franchisees, as well as local management of
company-owned stores, to develop local market relationships and retail sales
initiatives that coordinate with Dollar's national advertising programs. Dollar
makes available print and broadcast advertising materials to franchisees for use
in local markets, and pays a promotional allowance for qualifying advertising
expenditures to the franchisees that participate in Dollar's fleet program.
Dollar has made filings under the intellectual property laws of
jurisdictions in which it or its licensees operate, including the U.S. Patent
and Trademark office, to protect the names, logos and designs identified with
Dollar. These marks are important for customer awareness and selection of Dollar
for vehicle rental.
Strategic Marketing Efforts
Travel agencies book approximately 49% of Dollar's non-tour vehicle
rentals through the major U.S. airline global distribution systems. Major travel
agency chains and consortia operate under preferred supplier agreements with
Dollar, as they do with other vehicle rental companies, and are supported by
Dollar's sales department. Under its preferred supplier arrangements, Dollar
provides these travel agency groups additional commissions or lower prices in
return for their featuring Dollar in their advertising or giving Dollar a
priority in their reservation systems. In general, these arrangements are not
exclusive to Dollar, and many travel agency groups have similar arrangements
with other vehicle rental companies.
10
SUMMARY OPERATING DATA OF DOLLAR
Years Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
(in thousands)
Revenues:
U.S. Company-owned stores ................ $438,722 $559,610 $605,187
U.S. and Canada franchisees .............. 55,212 51,256 50,011
International franchisees ................ 2,359 3,427 3,100
Other .................................... 1,174 1,989 1,421
-------- -------- --------
Total revenues ........................... $497,467 $616,282 $659,719
======== ======== ========
As of December 31,
-----------------
1996 1997 1998
---- ---- ----
Rental Locations:
U.S. Company-owned stores ................ 95 103 114
U.S. and Canada franchisee locations ..... 175 152 154
Franchisees:
U.S. and Canada .......................... 68 70 73
International ............................ 45 49 50
THRIFTY
GENERAL
Thrifty's main focus is on franchising and franchise support services.
Thrifty also operates company-owned stores in six cities in the United States
and Canada. Thrifty's company-owned stores and its franchisees derive
approximately 57% of their combined rental revenues from the airport market and
approximately 43% from the local market. Thrifty's approach of serving both the
airport and local markets within each territory allows many of its franchisees
and company-owned stores to have multiple locations to improve fleet utilization
and profit margins by moving vehicles among locations to better address
differences in demand between their markets. As airports have begun to institute
fees for vehicle rental companies located outside their properties, or limited
these companies' access to airport travelers, some Thrifty franchisees have
moved to on-airport locations. Thrifty believes that the local market offers
Thrifty's franchisees and company-owned stores better growth opportunities, less
pricing pressure, a lower cost structure and a more diverse customer base than
the airport market.
As of December 31, 1998, Thrifty's vehicle rental system included 634
rental locations in the United States and Canada, divided between 609 franchisee
locations and 25 company-owned stores. The Thrifty system also included 580
locations abroad, all of which were franchisee locations. Thrifty's total
revenue was $237.8 million in 1998, of which $206.1 million (86.7%) was revenue
from franchisees in the form of fleet leasing fees, commissions and other
service and product fees and $31.7 million (13.3%) of which was generated by
company-owned stores. Revenues from Thrifty's franchisees outside the United
States and Canada have not been material to its results of operations.
11
FRANCHISING
United States
Thrifty's U.S. franchisees are the core of its operations and are
essential to its long-term profitability and growth. Thrifty offers its
franchisees a full line of services and products not easily or cost-effectively
available from other sources. Thrifty actively promotes franchisee financial
stability and growth and seeks opportunities to enhance its vehicle rental
system by improving its services to franchisees, particularly its fleet leasing
programs, and by developing new franchisee revenue opportunities, such as
airport parking and truck rental. Thrifty also works closely with its U.S.
franchisees in formulating and implementing marketing and operating strategies.
Thrifty licenses its U.S. franchisees to use its service marks and
participate in its various services and systems. Franchisees pay Thrifty an
initial franchise fee based on such factors as the population, the number of
airline passengers, and total airport vehicle rental revenues and the level of
any other vehicle rental activity in the franchised territory. Franchises are
sold on an exclusive basis for a specific geographical territory, usually a city
or metropolitan area. Over the past five years, Thrifty's franchisee turnover
has averaged approximately 10% per year, with an average of 17 terminations and
24 new sales (including new territories added to existing franchise agreements)
per year.
Initial Franchise Fees, System Fees and Advertising Fees. Thrifty's
initial franchise fees are negotiated on a case-by-case basis, and may be
structured to promote expansion of an existing franchisee's operations into a
contiguous area. In addition to the initial franchise fee, its U.S. franchisees
pay Thrifty an administrative fee, which is generally 3% of base rental revenue,
excluding ancillary products.
U.S. franchisees also pay an advertising fee ranging from 2.5% to 5% of
base rental revenue to a separate advertising fund managed jointly by
franchisees and Thrifty management. Thrifty has implemented, and may implement
in the future, special short-term reductions in system and advertising fees to
encourage growth.
For 1998, Thrifty's five largest U.S. franchisees generated
administration, fleet leasing, reservation and other fees to Thrifty totaling
approximately 20% of Thrifty's total revenue.
Marketing to Prospective Franchisees. Thrifty has developed programs to
attract additional franchisees in the vehicle rental industry. Programs include
attracting independent vehicle rental companies with phased-in fees and
competitive fleet leasing terms, assisting individuals experienced in vehicle
rental operations to operate their own franchises through financial assistance,
start-up fleet supply and other support, and encouraging existing franchisees to
acquire and expand into neighboring territories by offering fleet incentives,
reduced administrative and advertising fees and lower initial franchise fees for
additional territories.
Fleet Leasing Program. Thrifty has a fleet leasing program for franchisees
that it believes provide them with a competitive and flexible source of fleet
vehicles. In 1998, fleet leasing accounted for approximately 71% of Thrifty's
total revenue. See "-- Fleet Acquisition and Management -- Fleet Leasing
Programs."
Training and Support. Thrifty's franchisees receive required initial
orientation, and ongoing training, in areas such as customer service and hiring.
In early 1997, Thrifty began implementing its "True Blue Pride Initiative" to
identify areas requiring customer service improvements and to implement new
standards to deliver faster and friendlier service. This initiative emphasizes
the role that franchisee customer service employees should have in identifying
and resolving customer complaints. New programs that have been developed as part
of the initiative include Thrifty's frequent renter program, Blue Chip, which
provides for preprinted rental contracts and expedited service.
Thrifty also publishes a comprehensive operating manual for franchisees
and provides operational support in areas such as cost control, fleet planning,
revenue management and local advertising and marketing. Thrifty also assists
franchisees on real estate matters, including site selection and airport
facility issues.
12
Worldwide Reservation Center and Other Information Systems. Thrifty's
franchisees benefit from Thrifty's continuously staffed worldwide reservation
center at its headquarters in Tulsa, Oklahoma and at its newly opened
reservation facility in Okmulgee, Oklahoma, which in 1998, collectively
processed approximately 4.2 million telephone calls and 1.8 million
reservations. All of Thrifty's reservation facilities are also linked to all of
the major U.S. airline reservation systems and through them to travel agencies
in the United States, Canada and abroad. These centers are a key means of
marketing the Thrifty system to consumers and travel agents and informing them
about the system's vehicle rental rates, products, promotions and services.
Thrifty franchisee payments for reservations made through these centers
accounted for approximately 4% of Thrifty's 1998 total revenues. Reservations
through Thrifty's Internet web site also increased in 1998.
U.S. franchisees receiving a certain volume of reservations are required
to use an approved automated counter system, usually leasing or subleasing the
related hardware and software from Thrifty or a third-party leasing agent. In
addition to providing an electronic data link with Thrifty's worldwide
reservation centers, the automated counter system prints rental agreements and
provides Thrifty and its franchisees with customer and vehicle inventory
information and financial and operating reports.
Thrifty supports its information systems through a combination of internal
resources and external technology providers. Thrifty has engaged SABRE to manage
and monitor its data center network and its daily information processing.
Reservation applications systems continue to be serviced by Perot Systems
Corporation ("Perot"). The arrangements with Perot give Thrifty access to
technical resources through the year 2000, thereby providing a greater level of
assurance that Thrifty can meet its need to maintain and improve important
applications. Other information systems are supported by Thrifty employees.
Thrifty's core information systems are either designed to, or are being
updated to, address the Year 2000 issues that might otherwise result if the
systems could not accommodate the date change at the turn of the century, as
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000." All of Thrifty's key systems are housed in a
secure underground SABRE facility in Oklahoma designed to withstand disasters.
Insurance, Supplies and National Account Programs. Thrifty makes available
to its franchisees for a fee insurance for death or injury to third parties,
property damage and damage to or theft of franchisee vehicles.
Thrifty makes bulk purchases of items used by its franchisees, which it
sells to franchisees at prices that are often lower than they could obtain on
their own. Thrifty also negotiates national account programs to allow its
franchisees to take advantage of volume discounts for many materials or services
used for operations such as tires, glass replacement, long distance telephone
service and overnight mail.
Parking Services. Airport parking operations are a natural complement to
vehicle rental operations. Thrifty encourages its franchisees that have
near-airport locations to add this ancillary business. Thrifty assists its
franchisees in obtaining additional property and in planning and implementing
parking operations. Franchisees benefit since the Thrifty service marks are
already on the premises, shuttle buses are already being operated for rental
customers and parking operations increase service levels and recognition at the
airports. Franchisees with parking operations may also offer ancillary services
such as car washes and oil changes to create additional opportunities to service
the vehicle while the traveler is away. Thrifty receives a royalty fee generally
equal to 3% of the total revenue generated from these services.
Services and Products Provided to Rental Customers. Thrifty's franchisees
provide their customers with products and services substantially similar to
those provided to customers by Dollar's company-owned stores.
International (Except Canada)
As of December 31, 1998, Thrifty master franchisees operated 580 vehicle
rental locations in 67 countries and territories outside the United States and
Canada. Regions with Thrifty franchisees include Latin America, Europe, the
Middle East and the Asia-Pacific region. Thrifty seeks to attract international
franchisees by emphasizing Thrifty's uniform image, brand marketing efforts,
worldwide reservation system and consistent vehicle rental system practices and
procedures.
13
Thrifty grants master franchises on a countrywide basis. Each master
franchisee is permitted to use directly and subfranchise others to use Thrifty's
service marks, systems and technologies within its country or territory.
COMPANY-OWNED STORES
Thrifty typically establishes company-owned stores only upon the financial
failure of a franchisee. Thrifty uses company-owned stores to preserve its
presence in key markets. As opportunities arise, these locations are
refranchised. During 1998, Thrifty reduced the number of cities in which it
operates company-owned stores from three to two in the United States by selling
a company store to a franchisee. The services and products Thrifty provides to
company-owned stores and those provided by company-owned stores to vehicle
rental customers are substantially similar to those provided to and by Thrifty's
U.S. franchisees.
THRIFTY CAR SALES
In December 1998, Thrifty Car Sales, Inc. was formed to operate its new
franchise system, "Thrifty Car Sales" which will sell primarily late model, low
mileage used vehicles. Because of the nature of the Group's business, it will
almost always have a supply of the type of vehicle inventory Thrifty Car Sales
will feature. Thrifty Car Sales may accordingly provide a cost-effective
distribution system for efficient disposal of the Group's vehicle fleet reducing
the Group's dependence on auctions. However, the Company also believes Thrifty
Car Sales can become an important source of additional revenue with very little
capital investment by the Company or Thrifty, Inc. Used vehicle retailers,
whether they acquire vehicles for sale from the Group or not, may desire to seek
a national brand identification like Thrifty.
There are now three Thrifty Car Sales franchise locations operating in
addition to a corporate operation in Tulsa. Thrifty Car Sales anticipates
opening seven additional franchise locations in the first quarter of 1999.
CANADIAN OPERATIONS
Thrifty operates in Canada through its wholly owned subsidiary, Thrifty
Canada, Ltd. ("TCL"). TCL operates company-owned stores in the four largest
airport vehicle rental markets in Canada and encourages franchisees to operate
in the remaining markets. As of December 31, 1998, the TCL system included 125
vehicle rental locations, of which 104 were operated by franchisees and 21 were
operated as company-owned stores.
Company-Owned Stores
TCL's company-owned store operations include four strategic airports:
Toronto, Montreal, Vancouver and Calgary. These operations are important to
maintaining a national airport presence in Canada, where TCL has significant
airport concession and lease commitments. Historically, TCL's operating results
have been adversely affected by losses incurred by company-owned stores.
Franchising
TCL provides services and products to its franchisees that are
substantially similar to those Thrifty provides to its U.S. franchisees,
including fleet leasing, insurance services, advertising and marketing support
and supplies. Due to the structure of the Canadian vehicle rental market, which
has a greater proportion of vehicle rental activity from on-airport locations
than off-airport locations as compared to the United States, Thrifty has sought
to strengthen its airport presence in Canada by encouraging existing and
prospective franchisees to locate on-airport. Canadian franchisees pay TCL a
combined monthly administrative and advertising fee fixed in most cases at 8% of
rental revenues.
MARKETING
Thrifty's marketing strategy is to position the Thrifty system as an
industry leader in delivering value for cost-conscious consumers. In the United
States it implements this strategy primarily through national advertising and
promotion assistance to U.S. franchisees in local advertising, promotion and
sales and strategic marketing partnerships.
14
Advertising, Promotion and Sales
Thrifty employs national advertising on U.S. broadcast and cable
television networks and in newspapers and travel industry and airline magazines.
Thrifty also sponsors sports and other events to increase national exposure and
promote local Thrifty operations. In the United States, Thrifty's national
advertising and marketing expenses are paid out of an advertising fund managed
by a national advertising committee consisting of representatives of Thrifty
franchisees and certain members of Thrifty management. U.S. franchisees and
company-owned stores contribute 5% of their base rental revenue from airport
operations and 2.5% of their base rental revenue from local operations to the
advertising fund.
U.S. franchisees and company-owned stores are also required to spend an
additional 3% of their base rental revenue on local advertising and promotion.
Thrifty has a local sales department that assists franchisees in developing
their local markets. Thrifty also provides an allowance for qualifying local
advertising, promotion and sales expenditures to U.S. franchisees that
participate in Thrifty's fleet leasing program. In the 1998 model year,
franchisees and company-owned stores earned an aggregate allowance of
approximately $7 million.
Thrifty has made filings under the intellectual property laws of
jurisdictions in which it or its licensees operate, including the U.S. Patent
and Trademark office, to protect the names, logos and designs identified with
Thrifty. These marks are important for customer awareness and selection of
Thrifty for vehicle rental.
Strategic Marketing Efforts
Thrifty's approach of targeting value-conscious consumers includes
strategic marketing partnerships, such as those it has with Montgomery Ward in
the United States, Canadian Tire in Canada and Ryder Truck Rental throughout
North America. Thrifty also has frequency-based marketing relationships with
numerous airlines and hotel chains. Since a significant portion of Thrifty's
rentals system-wide result from travel agency reservations, Thrifty maintains
its relationships with travel agency chains and consortia through preferred
supplier agreements, travel agent advertising and other efforts. Under its
preferred supplier arrangements, Thrifty provides these travel agency groups
additional commissions or lower prices in return for their featuring Thrifty in
their advertising or giving Thrifty a priority in their reservation systems. In
general, these arrangements are not exclusive to Thrifty, and many travel agency
groups have similar arrangements with other vehicle rental companies.
15
SUMMARY OPERATING DATA OF THRIFTY
Years Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
(in thousands)
Revenues:
U.S. and Canada franchisees .............. $138,809 $159,636 $200,505
U.S. and Canada company-owned stores ..... 63,522 63,946 34,408
International franchisees ................ 2,606 2,761 2,888
-------- -------- --------
Total revenues ........................... $204,937 $226,343 $237,801
======== ======== ========
As of December 31,
-----------------
1996 1997 1998
---- ---- ----
Rental Locations:
U.S. and Canada franchisee locations ..... 554 600 609
U.S. and Canada company-owned stores ..... 61 36 25
Franchisees:
U.S. and Canada .......................... 248 231 232
International ............................ 48 63 67
FLEET ACQUISITION AND MANAGEMENT
U.S. VEHICLE SUPPLY
For the 1998 model year, DaimlerChrysler vehicles represented over 87% of
Dollar's U.S. fleet and 95% of the vehicles in its fleet leasing program for
franchisees. Dollar also purchases vehicles from other automotive manufacturers,
permitting it to adjust the composition and overall cost of its fleet.
DaimlerChrysler vehicles made up 91% of the vehicles in Thrifty's fleet leasing
program. The Company expects that for the 1999 model year, DaimlerChrysler
vehicles will represent over 90% of Dollar's U.S. fleet and all of the vehicles
in its fleet leasing program, and over 90% of the vehicles in Thrifty's fleet
leasing program.
Automotive manufacturers' residual value programs limit the Group's
residual value risk. Under these programs, the manufacturer either guarantees
the aggregate depreciated value upon resale of covered vehicles of a given model
year, as is generally the case under DaimlerChrysler's program, or agrees to
repurchase vehicles at specified prices during established repurchase periods.
In either case, the manufacturer's obligation is subject to certain conditions
relating to the vehicle's age, physical condition and mileage. Vehicles
purchased by vehicle rental companies under these programs are referred to
herein as "Program Vehicles." Vehicles not purchased under these programs and
for which rental companies therefore bear residual value risk are referred to
herein as "Non-Program Vehicles." The Company believes that a majority of
vehicles owned by other U.S. vehicle rental companies are Program Vehicles.
For the 1998 model year, DaimlerChrysler Program Vehicles represented
approximately 70% of the vehicles in Dollar's and Thrifty's respective fleets
and approximately 80% and 78% of the vehicles in their respective fleet leasing
programs. DaimlerChrysler sets the terms of its residual value program before
the start of each model year. The terms include monthly depreciation rates,
minimum and maximum holding periods and mileages, model mix requirements and
vehicle condition and other return requirements. The residual value program
enables Dollar and Thrifty to limit their residual value risk with respect to
Program Vehicles because DaimlerChrysler agrees to reimburse Dollar and Thrifty
for any difference between the aggregate gross auction sale price of the Program
Vehicles for the particular model year and the vehicles' aggregate predetermined
residual value. Under the program, Dollar and Thrifty must sell the Program
Vehicles in closed auctions to DaimlerChrysler dealers. Dollar and Thrifty are
reimbursed under the program for certain transportation and auction-related
costs.
16
Dollar and Thrifty also purchase Non-Program Vehicles, when required by
manufacturers in connection with the purchase of Program Vehicles, or if they
believe there is an opportunity to lower their fleet costs or to fill model and
class niches not available through residual value programs. DaimlerChrysler,
which is the main provider of Non-Program Vehicles to Dollar and Thrifty, does
not set any terms or conditions on the resale of Non-Program Vehicles other than
required minimum holding periods. For the 1998 model year, approximately 16% of
the vehicles acquired by Dollar and Thrifty were Non-Program Vehicles. As of
December 31, 1998, the Group was subject to "residual value risk" on
approximately 24.5% of its fleet, with a book value of approximately $241
million.
The Group's operating results are materially affected by the depreciation
rates and other purchase terms provided under DaimlerChrysler's residual value
program, as well as by other purchase incentives DaimlerChrysler provides. The
percentage of vehicles acquired under DaimlerChrysler's and other manufacturers'
residual value programs in the future will depend upon a number of factors,
including the availability and cost of these programs. Residual value programs
enable Dollar and Thrifty to determine their depreciation expense on Program
Vehicles in advance. Vehicle depreciation is the largest single cost element in
the Group's operations. The percentage of the Group's vehicle rental fleets
benefiting from residual value programs could decrease if the automotive
manufacturers changed the size or terms of these programs. In that event, Dollar
and Thrifty would have increased residual value risk that could be material to
their results of operations and could adversely affect their ability to finance
their fleets. Second, because it is difficult to predict future vehicle resale
values, Dollar and Thrifty may not be able to manage effectively the residual
value risk on their Non-Program Vehicles. As recently as 1997, results for the
Group were adversely affected by lower than anticipated residual values. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year Ended December 31, 1997 Compared With Year Ended December 31,
1996." The residual value of Non-Program Vehicles depends on such factors as the
general level of pricing in the automotive industry for both new and used
vehicles. Prices for used vehicles generally decrease if the automotive
manufacturers increase the retail sales incentives they offer on new vehicles.
The Company cannot predict the level of retail sales incentives DaimlerChrysler
or the other automotive manufacturers will offer in the future. Dollar and
Thrifty have received substantial payments under residual value programs over
the past several years. See Note 5 of Notes to Consolidated Financial
Statements.
DaimlerChrysler has been the Group's principal supplier of vehicles. In
1996, DaimlerChrysler began operating under five-year vehicle supply
arrangements that were formalized in 1996 and 1997 in separate U.S. vehicle
supply agreements with Dollar and Thrifty ("VSAs"). DaimlerChrysler has agreed
to make specified volumes of DaimlerChrysler vehicles available to Dollar and
Thrifty through July 2001. Dollar and Thrifty may purchase vehicles for use by
company-owned stores or for their fleet leasing programs. Dollar and Thrifty
have agreed to promote DaimlerChrysler vehicles exclusively in their advertising
and other promotional materials. DaimlerChrysler has agreed to make various
promotional payments to Dollar and Thrifty, some of which vary based on the
volume of vehicles purchased. These payments are material to the Group's results
of operations. See Note 5 of Notes to Consolidated Financial Statements.
The VSAs provide that Dollar and Thrifty will each purchase at least 80%
of their respective vehicles from DaimlerChrysler until a certain minimum level
is reached. Also, certain minimum numbers of vehicles must be Program Vehicles.
While DaimlerChrysler has the sole discretion to set the specific terms and
conditions of its residual value program for a model year, it has agreed in the
VSAs to offer programs to Dollar and Thrifty that, taken as a whole, are
competitive with a residual value program Ford or General Motors Corporation
("General Motors") is then making generally available to domestic vehicle rental
companies.
If purchases of DaimlerChrysler vehicles by Dollar or Thrifty during any
model year exceed certain targets, DaimlerChrysler will make available to Dollar
or Thrifty additional Program Vehicles up to a maximum of 15% of the target
number of DaimlerChrysler Program Vehicles.
17
VEHICLE DISPOSITION
The Group generally holds vehicles in rental service from six months to 18
months. The length of service is determined by taking into account seasonal
rental demand and the average monthly mileage accumulation. Most vehicles must
be removed from service before they reach 30,000 miles to avoid significant
penalties under DaimlerChrysler's residual value program. As of December 31,
1998, the average age of vehicles in the Group's fleet was approximately five
months. The Group's flexibility to adjust the holding period for vehicles,
particularly for Program Vehicles, enables the Group to adjust its fleet size up
or down relatively quickly in response to changing market conditions. Less than
4% of the Group's DaimlerChrysler Program Vehicles were ineligible for return
based on repair condition during 1998. Dollar or Thrifty must bear the risk on
the resale of Program Vehicles that cannot be returned. Dollar and Thrifty
dispose of Non-Program Vehicles through auctions and directly to used car
dealers or franchisees. Dollar and Thrifty may also sell Non-Program Vehicles to
corporate operations or franchisees of Thrifty Car Sales.
Dollar and Thrifty each believe that, instead of through auction, the sale
of vehicles directly to dealers, including Thrifty Car Sales, reduces their
disposal costs and saves interest due to a quicker return time on vehicle
proceeds. Both Dollar and Thrifty use telemarketing to sell cars directly to
dealers. Separate from Thrifty Car Sales, Dollar continues to develop its own
plans for a used vehicle disposal network.
MAINTENANCE
Dollar and certain Thrifty franchisees may have automotive maintenance
centers at airports and in urban and suburban areas. Many of these facilities
are accepted by automotive manufacturers as eligible to perform and receive
reimbursement for warranty work. Collision damage and major repairs are
generally performed by independent contractors. Dollar's and Thrifty's
franchisees are responsible for the maintenance of their fleet vehicles.
FLEET LEASING PROGRAMS
Dollar and Thrifty make fleet leasing programs available to their U.S.
franchisees for each new model year. The terms of their fleet leasing programs
generally mirror the requirements of various manufacturers' residual value
programs with respect to model mix, order and delivery, vehicle maintenance and
returns, but also include Non-Program Vehicles. Dollar and Thrifty monitor the
creditworthiness and operating performance of franchisees participating in their
fleet leasing programs and periodically audit franchisees' leased fleets. Dollar
and Thrifty design their fleet leasing programs to offer their franchisees an
attractive means of obtaining fleet vehicles. For 1998, approximately 46% and
75% of the vehicles in the fleets of Dollar's and Thrifty's respective U.S.
franchisees had been provided through their fleet leasing programs. In 1998,
approximately 5% of Dollar's and 71% of Thrifty's (including Canada) total
revenue was derived from vehicle leasing programs. During 1998, a limited number
of larger franchisees acquired their vehicles directly from manufacturers.
The Group sets their lease rates after considering residual value program
depreciation rates for Program Vehicles, estimated Non-Program Vehicle
depreciation, interest costs, model mix and administrative costs. Average
monthly lease rates vary depending on vehicle model, and the average lease
period is between eight and ten months. Although Dollar and Thrifty lease
Non-Program Vehicles as well as Program Vehicles to their franchisees, their
fleet leasing programs eliminate the residual value risk for their franchisees.
Thrifty franchisees may, however, elect to assume some residual value risk on
certain Non-Program Vehicles they lease in exchange for a lower lease rate.
18
U.S. FLEET DATA
Years Ended December 31,
1996 1997 1998
------ ------ ------
Thrifty:
Average number of vehicles leased to franchisees .... 20,358 23,878 29,595
------ ------ ------
Average number of vehicles in combined fleets of
franchisees ...................................... 28,122 31,854 39,434
Average number of vehicles in combined fleets of
company-owned stores ............................. 3,862 3,470 865
------ ------ ------
Total ....................................... 31,984 35,324 40,299
====== ====== ======
Dollar:
Average number of vehicles leased to franchisees .... 7,801 6,735 6,151
------ ------ ------
Average number of vehicles in combined fleets of
franchisees ...................................... 17,132 13,523 13,513
Average number of vehicles in combined fleets of
company-owned stores ............................. 38,952 47,813 50,673
------ ------ ------
Total ....................................... 56,084 61,336 64,186
====== ====== ======
COMPETITION
There is intense competition in the vehicle rental industry on the basis
of price, service levels, vehicle quality, vehicle availability and convenience
and condition of rental locations. The Group's principal competitors have larger
market shares and rental volumes, greater financial resources and more
sophisticated information systems. Dollar operates mainly in the U.S. airport
market, although compared to its competitors it relies more heavily on
discretionary leisure, tour and business customers. Dollar's franchisees have a
similar customer profile. In any given location, Dollar may compete with
national, regional and local vehicle rental companies, many of which have
greater financial resources than the Group. Dollar's principal competitors for
discretionary business and leisure travelers are Alamo Rent-a-Car, Inc., Avis
Rent A Car, Inc., Budget Group, Inc., The Hertz Corporation, National Car Rental
System, Inc. and Thrifty. Dollar competes primarily on the basis of price and
customer service.
Thrifty's U.S. franchisees and company-owned stores generally compete for
cost-conscious consumers with Alamo, Avis, Budget, Dollar, Hertz and National.
Enterprise Rent-A-Car Company, Hertz, Avis and CarTemps USA (a division of
Republic Industries) as well as local and regional rental companies are major
competitors in the local market. They compete on the basis of price, location,
service and well-established customer relationships. Most Thrifty franchisees
and company-owned stores compete in the local market for retail general use
business rather than insurance replacement rentals.
The Canadian vehicle rental markets are also intensely competitive. The
vast majority of the Canadian market is operated either directly or through
franchisees of the major U.S. vehicle rental companies, including Budget, Avis,
Hertz and National, as well as Dollar and Thrifty.
INSURANCE
The Group is subject to third-party public liability and property damage
claims resulting from accidents involving their rental customers. For
third-party bodily injury and property damage claims arising from the use of a
vehicle in the United States, the Group retained the risk of loss ranging from
$250,000 to $2 million on a per occurrence basis (the "self-insured retention")
over the last three years. For claims in excess of the self-insured retention,
the Group maintains insurance at certain amounts in excess of their respective
self-insured retention levels and coverages.
The Group retains the risk of loss for general and garage liability
insurance coverage up to $1 million and maintains insurance at certain amounts
in excess of $1 million. They also maintain catastrophic and comprehensive
coverage for damage to vehicles owned by them up to $3 million per occurrence
with a deductible amount of $250,000. In addition, the Group carries workers'
compensation, excess liability and directors' and officers' liability insurance
coverage.
19
Provisions for public liability and property damage on self-insured claims
are made by charges to expense based upon evaluations of estimated ultimate
liabilities on reported and unreported claims. As of December 31, 1998, the
Group's reserve for liability claims was approximately $78 million. The Group's
obligations to pay these losses and indemnify the insurance carriers are
collateralized by surety bonds. As of December 31, 1998, these surety bonds
totaled approximately $85 million.
The Group also maintains various surety bonds to secure performance under
airport concession agreements and other obligations. As of December 31, 1998,
the total amount of these bonds was approximately $16 million.
REGULATION
LOSS DAMAGE WAIVERS AND SUPPLEMENTAL LIABILITY INSURANCE
Approximately 13% and 9% of the 1998 vehicle rental revenues of Dollar and
Thrifty, respectively, were generated from the sale of loss damage waivers.
These waivers relieve customers from financial responsibility for vehicle
damage. Legislation affecting the sale of loss damage waivers has been adopted
in 25 states. These laws either require disclosure to customers that loss damage
waivers may not be necessary, limit customer liability to specified amounts,
limit the ability of vehicle rental companies to offer loss damage waivers for
sale or cap the amounts that may be charged for loss damage waivers. Adoption of
national or additional state legislation limiting the sale, or capping the
rates, of loss damage waivers could further restrict sales of this product, and
additional limitations on potential customer liability could increase costs to
Dollar, Thrifty and their franchisees.
Dollar and Thrifty and other vehicle rental companies sell customers
supplemental liability insurance ("SLI"). In 1997, Dollar, Thrifty and the other
principal vehicle rental companies entered into a consent order with the Texas
Department of Insurance in which they agreed to stop selling SLI in Texas
pending licensing and product approval. In 1998, the Texas Department of
Insurance established regulations for licensing and product approval. Both
Dollar and Thrifty obtained licensing and product approval and began selling the
approved product in September 1998. A civil action was also brought in Alabama
alleging violation of state insurance laws. See "Legal Proceedings." Additional
actions in other jurisdictions could lead to restrictions on the sale of SLI,
which would result in a reduction of the Group's revenues.
FRANCHISING REGULATION
As franchisors, Dollar and Thrifty are subject to federal, state and
foreign laws regulating various aspects of franchise operations and sales. These
laws impose registration and disclosure requirements on franchisors in the offer
and sale of franchises and, in certain states, also apply substantive standards
to the relationship between the franchisor and the franchisee, including those
pertaining to default, termination and nonrenewal of franchises.
OTHER MATTERS
Certain states currently make vehicle owners (including vehicle rental
companies) vicariously liable for the actions of any person lawfully driving an
owned vehicle, regardless of fault. Some of these states, including Florida and
New York, do not limit this liability. Vehicle rental companies are also subject
to various federal, state and local consumer protection laws and regulations
including those relating to advertising and disclosure of charges to customers.
Dollar and Thrifty are subject to federal, state and local laws and
regulations relating to taxing and licensing of vehicles, franchise sales,
franchise relationships, vehicle liability, used vehicle sales, insurance,
telecommunications, vehicle rental transactions and labor matters. The Company
believes that Dollar and Thrifty practices and procedures are in substantial
compliance with federal, state and local laws and is not aware of any material
expenditures necessary to meet legal or regulatory requirements. Nevertheless,
considering the nature and scope of Dollar's and Thrifty's businesses, it is
possible that regulatory compliance problems could be encountered in the future.
20
ENVIRONMENTAL MATTERS
The principal environmental regulatory requirements applicable to Dollar
and Thrifty operations relate to the ownership, storage or use of petroleum
products such as gasoline, diesel fuel and new and used motor oil; the treatment
or discharge of waste waters; the operation of automotive body shops; and the
generation, storage, transportation and off-site treatment or disposal of waste
materials. Dollar and Thrifty own eleven and lease 77 locations where petroleum
products are stored in underground or above-ground tanks. For owned and leased
properties, Dollar and Thrifty have programs designed to maintain compliance
with applicable technical and operational requirements, including leak detection
testing of underground storage tanks, and to provide financial assurance for
remediation of spills or releases.
The historical and current uses of the Dollar and Thrifty facilities may
have resulted in spills or releases of various hazardous materials or wastes or
petroleum products ("Hazardous Substances") that now, or in the future, could
require remediation. The Group also may be subject to requirements related to
remediation of Hazardous Substances that have been released into the environment
at properties they own or operate, or owned or operated in the past, or at
properties to which they send, or have sent, Hazardous Substances for treatment
or disposal. Such remediation requirements generally are imposed without regard
to fault, and liability for any required environmental remediation can be
substantial.
Dollar and Thrifty may be eligible for reimbursement or payment of
remediation costs associated with releases from registered underground storage
tanks in U.S. states that have established funds to assist in the payment of
such remediation costs. Subject to certain deductibles, the availability of
funds, the compliance status of the tanks and the nature of the release, these
tank funds may be available to Dollar and Thrifty for use in remediating
releases from their tank systems.
At certain facilities, Dollar and Thrifty presently are investigating or
remediating soil or groundwater contamination. Based on currently available
information, the Company does not believe that the costs associated with
environmental investigation or remediation will be material. However, additional
contamination could be identified or occur in the future.
The use of automobiles and other vehicles is subject to various
governmental requirements designed to limit environmental damage, including that
caused by emissions and noise. Generally, these requirements are met by the
manufacturer except, on occasion, equipment failure requiring repair by the
Group.
Environmental legislation and regulations and related administrative
policies have changed rapidly in recent years. There is a risk that governmental
environmental requirements, or enforcement thereof, may become more stringent in
the future and that the Group may be subject to legal proceedings brought by
government agencies or private parties with respect to environmental matters. In
addition, with respect to cleanup of contamination, additional locations at
which wastes generated by the Group may have been released or disposed, and of
which the Group is currently unaware, may in the future become the subject of
cleanup for which the Group may be liable, in whole or part. Accordingly, while
the Group believes that it is in substantial compliance with applicable
requirements of environmental laws, there can be no assurance that the Group's
future environmental liabilities will not be material to the Group's
consolidated financial position or results of operations or cash flows.
EMPLOYEES
As of December 31, 1998, the Group employed a total of approximately 4,900
full-time and part-time employees of whom approximately 3,900 were employed by
Dollar and 1,000 by Thrifty. Approximately 90 of the Group's employees were
subject to collective bargaining agreements as of December 31, 1998. The Company
believes the Group's relationship with its employees is good.
21
ITEM 2. PROPERTIES
The Company owns its headquarters located at 5330 East 31st Street, Tulsa,
Oklahoma. This location is a three building office park that houses headquarters
and a reservation center for Dollar and Thrifty. These buildings and the related
improvements were mortgaged in December 1997 pursuant to a mortgage in favor of
Credit Suisse First Boston ("CSFB"), as administrative agent for a syndicate of
banks. The mortgage was executed in connection with the Revolving Credit
Facility, as described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
Dollar and Thrifty each own or lease real property used for company-owned
stores and office facilities, and in some cases own real property that is
subleased to franchisees or other third parties. As of December 31, 1998, the
Group's owned operations were carried on at 139 locations worldwide. Most of
these premises are leased, except for two that are owned. Dollar and Thrifty
each operate company-owned stores under concession agreements with various
governmental authorities charged with the operation of airports. Concession
agreements for airport locations, which are sometimes competitively bid, are
important for securing air traveler business.
In connection with the Revolving Credit Facility, Dollar executed
mortgages in favor of CSFB encumbering its real property located in San Diego
and Tampa. Thrifty also executed mortgages in favor of CSFB encumbering its real
property located in Phoenix, Ft. Lauderdale, Orlando, Dallas, Houston, and Salt
Lake City.
ITEM 3. LEGAL PROCEEDINGS
On November 2, 1994, the City of San Jose, California filed an action in
the Superior Court of California, against Chevron, Dollar and others, seeking
unspecified compensatory and punitive damages and injunctive relief. The City of
San Jose has not served process on Dollar. The suit relates to pollution at a
site currently occupied by Dollar and formerly occupied by Chevron. Dollar has
partially remediated the affected soil, but not the allegedly affected ground
water. Dollar believes that prior uses of the site resulted in any remaining
contamination at the site.
On October 2, 1997, a purported class action suit was filed in the Circuit
Court of Coosa County, Alabama, against Dollar, Thrifty and other car rental
companies. The plaintiffs in this suit alleged violations of state law in
connection with the sale by the car rental companies of certain insurance
products. Dollar and Thrifty have filed answers denying the alleged violations.
The case has been removed to the U.S. District Court for the Middle District of
Alabama. Plaintiffs filed an amended complaint on February 16, 1998, dropping
their fraud allegations, but adding a claim for a refund of the amounts paid for
insurance. Dollar, Thrifty and other car rental companies have filed a motion to
dismiss the conspiracy claim portion of the suit.
In addition to the foregoing, various legal actions, claims and
governmental inquiries and proceedings are pending or may be instituted or
asserted in the future against the Company and its subsidiaries. Litigation is
subject to many uncertainties, and the outcome of the individual litigated
matters is not predictable with assurance. It is possible that certain of the
actions, claims, inquiries or proceedings, including those discussed above,
could be decided unfavorably to the Company or the subsidiaries involved.
Although the amount of liability with respect to these matters cannot be
ascertained, potential liability is not expected to materially affect the
consolidated financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
22
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the trading symbol "DTG." The high and low sales prices for the
Common Stock for each quarterly period from December 17, 1997, the date the
Common Stock began trading on the NYSE, were as follows:
1997 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
High N/A N/A N/A $21-9/16
Low N/A N/A N/A $20-1/2
1998
----
High $24-1/4 $24-7/16 $16-9/16 $14-5/8
Low $18-3/8 $12 $ 9-7/8 $ 8-11/16
The 24,125,941 shares of Common Stock outstanding at March 1, 1999 were
held by 3,832 stockholders of record.
The Company intends to reinvest its earnings in its business and therefore
does not anticipate paying any cash dividends in the foreseeable future. The
Company has not paid cash dividends since completion of the Offering.
Under the terms of the Revolving Credit Facility, restrictions were
imposed by the lender on the payment of cash dividends to stockholders. During
the five-year term of such agreement, dividends are permitted at the lesser of
specified monetary levels or percentages of cash flow.
23
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data of the Group
The selected consolidated statement of operations and balance sheet data
were derived from the audited consolidated financial statements of the Group.
References to system-wide vehicle rental revenue include revenue received from
the Group company-owned stores and by franchisees from the rental of vehicles.
Years Ended December 31,(b)
--------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS
(IN THOUSANDS):
Revenues:
Vehicle rental ................................ $ 413,424 $ 372,508 $ 497,239 $ 620,045 $ 635,033
Vehicle leasing ............................... 172,999 177,836 149,713 164,701 202,371
Fees and services ............................. 58,966 49,382 47,597 49,143 51,770
Other ........................................... 8,614 9,653 9,342 9,899 9,234
----------- ----------- ----------- ---------- ----------
Total revenues .............................. 654,003 609,379 703,891 843,788 898,408
----------- ----------- ----------- ---------- ----------
Costs and expenses:
Direct vehicle and operating .................. 234,370 190,577 242,466 281,485 285,457
Vehicle depreciation, net ..................... 210,975 196,367 213,143 277,276 288,443
Selling, general and administrative ........... 143,155 123,439 140,089 149,697 161,471
Interest expense, net ......................... 83,526 78,817 72,868 87,852 88,726
Amortization of cost in excess of net
assets acquired .............................. 11,517 10,456 8,169 6,010 5,417
Intangible asset impairment losses ............ - - 157,758 - -
Restructuring charge (reversal) ............... (7,000) - - - -
Loss on sale of Snappy ........................ 40,893 - - - -
----------- ----------- ----------- ---------- ----------
Total costs and expenses .................... 717,436 599,656 834,493 802,320 829,514
----------- ----------- ----------- ---------- ----------
Income (loss) before income taxes ............... (63,433) 9,723 (130,602) 41,468 68,894
Income tax expense (benefit) .................... (12,755) 9,753 16,682 23,427 31,229
----------- ----------- ----------- ---------- ----------
Net income (loss)(a) ............................ $ (50,678) $ (30) $ (147,284) $ 18,041 $ 37,665
=========== =========== =========== ========== ==========
Basic and diluted earnings (loss)
per share (a) ................................... $ (2.53) $ 0.00 $ (7.36) $ 0.90 $ 1.56
=========== =========== =========== ========== ==========
BALANCE SHEET DATA (IN THOUSANDS):
Revenue-earning vehicles, net ................... $ 991,276 $ 958,799 $ 1,120,346 $1,319,490 $1,342,066
Total assets .................................... 1,585,651 1,657,823 1,647,951 1,942,210 1,865,300
Total debt ...................................... 1,047,065 1,128,811 1,241,558 1,418,687 1,313,799
Stockholders' equity ............................ 331,159 331,189 183,883 268,426 315,433
24
Years Ended December 31 ,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
System-Wide Data (U.S. and Canada)(c):
Vehicle rental revenue (in thousands):
Company-owned stores .............................. $ 359,951 $ 372,508 $ 495,598 $ 618,120 $ 635,033
Franchisee locations .............................. 558,049 556,492 502,402 515,880 619,552
---------- ---------- ---------- ---------- ----------
Total ......................................... $ 918,000 $ 929,000 $ 998,000 $1,134,000 $1,254,585
========== ========== ========== ========== ==========
Rental locations:
Company-owned stores .............................. 169 162 156 139 139
Franchisee locations .............................. 773 720 729 752 763
---------- ---------- ---------- ---------- ----------
Total rental locations ........................ 942 882 885 891 902
========== ========== ========== ========== ==========
Average number of vehicles
operated during the period
by company-owned stores
and franchisees ..................................... 98,974 93,989 94,992 103,417 111,652
Peak number of vehicles
operated during the period
by company-owned stores
and franchisees ..................................... 117,906 108,447 110,771 122,286 134,407
Company-Owned Stores Data
(U.S. and Canada)(c):
Average number of vehicles
operated ............................................ 40,083 36,246 45,037 53,719 53,983
Number of rental
transactions ........................................ 2,230,076 2,196,611 2,817,269 3,300,420 3,320,294
Average revenue per
transaction ........................................ $ 161 $ 170 $ 176 $ 187 $ 191
Monthly average revenue
per vehicle ......................................... $ 748 $ 856 $ 917 $ 959 $ 980
Vehicle Leasing Data (U.S. and Canada)(c):
Average number of vehicles
leased ............................................. 41,072 34,373 30,583 32,814 37,709
Average monthly lease revenue
per unit ........................................... $ 349 $ 400 $ 409 $ 420 $ 447
(a) Management believes it is important to note that net income (loss) and
earnings per share for the year ended December 31, 1996 include intangible
asset impairment losses of $157,758,000, related to DaimlerChrysler's
decision in 1996 to dispose of Thrifty as a non-core asset ($155,000,000)
and an impairment loss related to TCL ($2,758,000).
(b) Certain reclassifications have been made in the selected consolidated
financial data to conform to the classifications used in 1998.
(c) Excludes 1994 data for Snappy, which was sold in September 1994.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Group owns two vehicle rental companies, Dollar and Thrifty. They
engage in the business of renting vehicles directly to retail and tour customers
and providing vehicle leasing and other services to franchisees that rent to
customers. The majority of Dollar's revenue is derived from renting vehicles to
customers from company-owned stores, while the majority of Thrifty's revenue is
generated from leasing vehicles and providing services to franchisees.
The Group's revenues consist of:
o Vehicle rentals -- revenue generated from renting vehicles to customers,
including all related charges, through company-owned stores,
o Vehicle leasing -- revenue generated from leasing vehicles, primarily to
franchisees,
o Fees and services -- revenue generated from franchise fees and providing
reservations, insurance, supplies and other products and services
to franchisees, and
o Other -- revenue generated from franchise sales, parking income,
non-vehicle lease income and interest income derived from franchisees.
The Group's expenses consist of:
o Direct vehicle and operating -- costs related to the rental of
revenue-earning vehicles to customers and to the leasing of vehicles to
franchisees, such as leasing expenses, concessions and commissions paid
to airport authorities, commissions paid to travel agencies, insurance
and lease promotion expenses, net of certain incentives received from
vehicle manufacturers,
o Vehicle depreciation, net -- depreciation expense relating to
revenue-earning vehicles, net of gains and losses on the disposal of
such vehicles,
o Selling, general and administrative expenses, including advertising and
marketing expenses and reservations,
o Interest expense, net -- interest expense, net of interest earned on
restricted cash and working capital facility, relating primarily to
revenue-earning vehicle financing and to working capital debt, and
o Amortization of cost in excess of net assets acquired.
The Group's profitability is primarily a function of the volume and
pricing of rental transactions, utilization of the vehicles and the number of
vehicles leased to franchisees. Significant changes in the purchase price of
vehicles or interest rates can also have a significant effect on the Group's
profitability, depending on the ability of the Group to adjust pricing and lease
rates for these changes.
The Group's business requires significant expenditures for vehicles and
consequently, requires substantial liquidity to finance such expenditures.
26
RESULTS OF OPERATIONS
The following table sets forth the percentage of operating revenues
represented by certain items in the Group's consolidated statement of
operations:
Years Ended December 31, (b)
-----------------------------
1996 1997 1998
---- ---- ----
Revenues:
Vehicle rentals ...................... 70.6% 73.5% 70.7%
Vehicle leasing ...................... 21.3% 19.5% 22.5%
Fees and services .................... 6.8% 5.8% 5.8%
Other ................................ 1.3% 1.2% 1.0%
----- ----- -----
Total revenues ....................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Direct vehicle and operating ......... 34.4% 33.4% 31.8%
Vehicle depreciation, net ............ 30.3% 32.9% 32.1%
Selling, general and administrative .. 19.9% 17.7% 17.9%
Interest expense, net ................ 10.3% 10.4% 9.9%
Amortization of cost in excess
of net assets acquired ............... 1.2% 0.7% 0.6%
Intangible asset impairment losses ... 22.4% 0.0% 0.0%
----- ----- -----
Total costs and expenses ........ 118.5% 95.1% 92.3%
----- ----- -----
Income (loss) before income taxes ...... (18.5)% 4.9% 7.7%
Income tax expense (benefit) ........... 2.4% 2.8% 3.5%
----- ----- -----
Net income (loss) (a) .................. (20.9)% 2.1% 4.2%
===== ===== =====
- ----------
(a) Net loss for the year ended December 31, 1996 includes intangible
asset impairment losses related to DaimlerChrysler's decision in 1996 to
dispose of Thrifty as a non-core asset and an impairment loss related to
TCL. In 1997, the Group incurred a one-time tax charge of $4,314,000
related to its separation from DaimlerChrysler.
(b) Certain reclassifications have been made in the 1996 and 1997 consolidated
financial statements to conform to the classifications used in 1998.
The following table sets forth a breakdown of the Group's two major
sources of revenue:
Years Ended December 31, (a)
-----------------------------
1996 1997 1998
---- ---- ----
(in thousands)
Vehicle rental revenue:
Dollar .................... $436,715 $559,101 $603,331
Thrifty ................... 60,524 60,944 31,702
-------- -------- --------
Total ............... $497,239 $620,045 $635,033
======== ======== ========
Leasing revenue:
Dollar .................... $ 37,729 $ 34,452 $ 33,224
Thrifty ................... 111,969 130,249 169,147
Other ..................... 15 - -
-------- -------- --------
Total ............... $149,713 $164,701 $202,371
======== ======== ========
- ----------
(a) Certain reclassifications have been made in the 1996 and 1997 consolidated
financial statements to conform to the classifications used in 1998.
27
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenue for the year ended December 31, 1998 increased $54.6
million, or 6.5%, to $898.4 million compared to 1997. The increase in total
revenue was due to an increase in leasing revenue of 22.9% over 1997 and a 2.4%
growth in rental revenue. Fees and services revenue increased $2.6 million due
to a final payment received related to Dollar's terminated European franchise
agreement and higher franchise fees and other revenue fees from franchisees.
Vehicle rental revenue and vehicle leasing revenue were impacted by the
re-franchising of company-owned stores at Thrifty and by franchise acquisitions
at Dollar.
The Group's vehicle rental revenue for 1998 was $635 million, a 2.4%
increase from 1997. This increase was due primarily to a $44.2 million increase
for Dollar offset by a $29.2 million decline at Thrifty. The increase in vehicle
rental revenue at Dollar was the result of an increase of 6.6% in transactions
combined with a 1% increase in revenue per transaction. The rental revenue
growth at Dollar related to the acquisition of franchisees during 1998 totaled
$21.4 million, which represented 48% of Dollar's total rental revenue growth.
The decline at Thrifty was due to the re-franchising of several company-owed
stores during 1997 and early 1998.
Vehicle leasing revenue for 1998 was $202.4 million, a $37.7 million
increase from 1997. This increase in vehicle leasing revenue reflects an
increase of $38.9 million, or 29.9%, in Thrifty's leasing revenue primarily due
to a 23.9% increase in the average number of vehicles leased to franchisees
along with a 4.9% increase in the vehicle leasing rates. Dollar's leasing
revenue declined $1.2 million, or 3.6% due to a decrease in the average number
of vehicles leased to franchisees as a result of the acquisition of several
franchised locations during 1998.
EXPENSES
Total expenses increased 3.4% from $802.3 million in 1997 to $829.5
million in 1998. This increase was due primarily to a $28.1 million, or 4.8%
increase for Dollar offset by a $2.1 million, or 1% decline at Thrifty. Total
expenses as a percentage of revenue declined to 92.3% in 1998 from 95.1% in
1997.
Direct and vehicle operating expenses for 1998 increased $4 million, or
1.4%, over 1997, comprised of a $10.4 million increase at Dollar offset by a
$6.4 million decline at Thrifty. The overall increase was due to higher
personnel costs, airport concession fees and tour account incentives at Dollar
partially offset by a reduction of expenses at Thrifty as a result of the
re-franchising of several company-owned stores. These expenses were 31.8% of
revenue for 1998, compared to 33.4% of revenue for 1997. These expenses improved
as a percentage of revenue partially due to a decrease in the proportion of
total revenue generated from vehicle rentals at company-owned stores, which
carry additional costs not associated with vehicle leasing revenue. The shift in
revenue from vehicle rentals to vehicle leasing resulted primarily from
re-franchising several Thrifty company-owned stores in late 1997 and early 1998.
Net vehicle depreciation expenses increased $11.2 million or 4% for 1998
as compared to 1997, consisting of an $11.1 million increase at Dollar and a
$0.1 million increase at Thrifty. The increase was primarily due to a 5.4%
increase (6.1% at Dollar and 4.3% at Thrifty) in depreciable fleet partially
offset by a decline of 1.5% (0.4% increase at Dollar and a 4% decrease at
Thrifty) in the average depreciation rate. In 1998, the Company recorded higher
depreciation rates on Non-Program Vehicles, which were partially offset by a
$5.5 million net vehicle disposition gain on the disposal of Non-Program
Vehicles. In 1997, the disposition of Non-Program Vehicles resulted in a net
vehicle disposition loss of $11.4 million.
Selling, general and administrative expenses of $161.5 million for 1998
increased 7.9% from $149.7 million in 1997, comprised of a $9.3 million increase
at Dollar, a $0.6 million increase at Thrifty and a $1.9 million increase for
other operations. The higher costs were due to higher personnel costs related to
the development of new information technology systems, sales and marketing and
Year 2000 remediation costs. Higher expenses in 1998 were also the result of
one-time cost reductions in 1997 related to the settlement of a $1.5 million
condemnation claim and the reversal of a $1.1 million reserve related to
resolved litigation at Dollar and the elimination of a $1.9 million reserve
related to the sale of Snappy in 1994 Selling, general and administrative
expenses for the Group were 17.9% of revenue for 1998 compared to 17.7% for
1997.
28
Net interest expense increased $0.9 million, or 1% to $88.7 million
comprised primarily of a $3.6 million increase at Thrifty partially offset by a
$2.1 million decrease at Dollar. Net interest expense decreased as a percentage
of revenue from 10.4% in 1997 to 9.9% in 1998. The increase in expense for the
Group was due to the effect of higher average vehicle debt levels partially
offset by a decrease in vehicle interest rates.
The tax provision for 1998 was $31.2 million. The effective rate of 45.3%
in 1998 differs from the U.S. statutory rate due primarily to non-deductible
amortization costs in excess of net assets acquired, state and local taxes and
losses relating to Thrifty's Canadian subsidiary for which no benefit was
recorded. The effective rate for 1997 was 56.5% due primarily to non-deductible
amortization costs in excess of net assets acquired, losses relating to
Thrifty's Canadian subsidiary for which no benefit was recorded, and the
one-time tax charge of $4.3 million related to the separation from
DaimlerChrysler.
OPERATING RESULTS
The Group had income before income taxes of $68.9 million for 1998 as
compared to $41.5 million in 1997, a 66.1% increase. This growth was due to a
$15.3 million increase at Dollar and a $13.6 million increase at Thrifty. Income
before income taxes declined for other operations in 1998 due primarily to the
elimination of a $1.9 million reserve during 1997 related to the sale of Snappy
in 1994.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES
The Group's total revenues for 1997 were $843.8 million, an increase of
$139.9 million, or 19.9% compared to 1996. Dollar's revenue was $616.3 million
for 1997, an increase of $118.8 million, or 23.9%, compared to 1996. Thrifty's
total revenues were $226.3 million for 1997, an increase of $21.4 million, or
10.4%, compared to 1996.
The Group's vehicle rental revenue for 1997 was $620 million, a 24.7%, or
$122.8 million, increase from 1996. This increase was due primarily to a $122.4
million, or 28%, increase for Dollar. The increase in vehicle rental revenue for
Dollar was due primarily to a 20.2% increase in the number of transactions in
combination with a 6.1% increase in revenue per transaction due to selected
price increases. The rental revenue growth related to the conversion of several
franchised locations to company-owned stores totaled $34 million, which
represented 28% of the total rental revenue growth.
Vehicle leasing revenue for 1997 was $164.7 million, a 10% increase from
1996. This increase in vehicle leasing revenue reflects an increase of $18.3
million, or 16.3%, in Thrifty's leasing revenues due primarily to a 14.4%
increase in the average number of vehicles leased to franchisees along with a
2.4% increase in the vehicle leasing rates. Dollar's leasing revenues declined
$3.3 million, or 8.7%, due to a decrease in the average number of vehicles
leased to franchisees as a result of the conversion of several franchised
locations to company-owned stores.
EXPENSES
Total expenses were $802.3 million for 1997, compared to $834.5 million
for 1996 resulting from a $100.8 million increase at Dollar and a $132.7 million
decrease at Thrifty. The 1996 expenses at Thrifty included a $155 million
intangible asset impairment loss required as a result of DaimlerChrysler's
decision to dispose of Thrifty as a non-core asset and an intangible asset
impairment loss related to TCL of $2.8 million. Excluding these intangible asset
impairment losses, total expenses for 1996 were $676.7 million, or 96.1% of
total revenues, and total expenses for 1997 were 95.1% of total revenues.
29
Direct vehicle and operating expense for 1997 increased $39 million, or
16.1%, over 1996. Direct vehicle and operating expenses for Dollar increased
$42.6 million for 1997 offset by a $3.7 million decline at Thrifty. The higher
costs were due to an increase in the number of vehicles operated and an increase
in per unit costs, which were partially offset, by an increase in manufacturer
promotional incentives related to the acquisition of vehicles. These expenses
were 33.4% of revenue for 1997, compared to 34.4% of revenue for 1996.
Net vehicle depreciation expense increased $64.1 million, or 30.1%, for
1997 over 1996 which included a $39.5 million increase at Dollar and a $24.7
million increase at Thrifty. The increase was primarily due to a 14.7% increase
(14.2% at Dollar and 15.4% at Thrifty) in depreciable fleet and a 13.6% increase
(14.1% at Dollar and 12.3% at Thrifty) in the average depreciation rate. Higher
average depreciation expense per unit was the result of the increased cost of
vehicles and losses on disposition of Non-Program Vehicles due to the
deterioration in the used vehicle market in 1997. The disposition of Non-Program
Vehicles resulted in a net vehicle disposition loss of $11.4 million in 1997
compared to a net vehicle disposition gain of $3.5 million in 1996.
Selling, general and administrative expenses increased $9.6 million, or
6.9%, for 1997 compared to 1996. This increase was due primarily to an $8.3
million increase at Dollar and a $3.3 million increase at Thrifty. Higher
selling, general and administrative expenses arose primarily from increases in
personnel costs and increases in sales and marketing expenditures partially
offset by lower bad debt and legal expenses. Higher expenses in 1997 were also
the result of the reversal of a sales tax reserve in 1996 that was accrued prior
to 1994. Selling, general and administrative expenses were 17.7% of revenue for
1997 compared to 19.9% for 1996.
Net interest expenses increased $15 million, or 20.6% from 1996 comprised
of an $11.8 million increase at Dollar and a $3.2 million increase at Thrifty.
The increase was primarily due to the effect of increased debt levels and higher
short-term interest rates in 1997. Increased debt levels were due to financing
the growth in fleet during 1997 and the increase in vehicle costs.
Amortization of cost in excess of net assets acquired was $2.2 million
less for 1997 than 1996, primarily due to the intangible asset impairment losses
at Thrifty discussed above.
The effective tax rate for 1997 was 56.5% due primarily to non-deductible
amortization costs in excess of net assets acquired, losses in Thrifty's
Canadian subsidiary for which no benefit was recorded, and the one-time tax
charge of $4.3 million related to the separation from DaimlerChrysler. For 1996,
the Group had income tax expenses of $16.7 million even though the loss before
income taxes was $130.6 million. This unfavorable tax result was due to
non-deductible expenses related to the intangible asset losses of $157.8
million, non-deductible amortization costs in excess of net assets acquired, and
losses in Thrifty's Canadian subsidiary for which no benefit was recorded.
OPERATING RESULTS
The Group had income before income taxes of $41.5 million compared to a
loss before income taxes of $130.6 million in 1996 due to the effect on the
Group of DaimlerChrysler's decision during 1996 to dispose of Thrifty as a
non-core asset. Dollar's income before income taxes was $34.7 million, in 1997,
an increase of $16.3 million from 1996. Thrifty's income before income taxes was
$5.2 million, in 1997, as compared to $8.9 million in 1996 when excluding the
impairment losses of $157.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Group's U.S. and Canadian operations are funded by cash provided by
operating activities and its financing arrangements. The Group's primary use of
funds is for the acquisition of revenue-earning vehicles. For the year ended
December 31, 1998, the Group's expenditures for revenue-earning vehicles were
$2.1 billion ($1.3 billion at Dollar and $0.8 billion at Thrifty) which were
partially offset by $1.8 billion ($1.1 billion at Dollar and $0.7 billion at
Thrifty) in proceeds from the sale of used vehicles.
30
The Company expects the amount of cash required to purchase vehicles, net
of proceeds from the sale of used vehicles, to increase in 1999 because rental
fleets are increasing to meet anticipated rental demand. The Group expects to
meet these cash requirements with cash provided from operations and its
increased vehicle financing facilities. The Group's need for cash to finance
vehicles is highly seasonal and typically peaks in the second and third quarters
of the year when fleet levels build up to meet seasonal rental demand. Fleet
levels are lowest in the fourth quarter when rental demand is at a seasonal low.
The Group also requires cash for non-vehicle capital expenditures. These
expenditures totaled $26.5 million in 1998 ($20.1 million at Dollar, $4.1
million at Thrifty and $2.3 million for other operations), $13.7 million in 1997
($10 million at Dollar, $3.1 million at Thrifty and $0.6 million for other
operations), and are estimated to be approximately $34 million in 1999. These
expenditures are expected to be financed with cash provided from operations. The
1999 capital expenditures include approximately $10 million for reservation,
tour and other information systems. Non-vehicle capital expenditures are
expected to be financed with cash provided by operations.
ASSET BACKED NOTES
The asset backed note program is comprised of $1.2 billion in asset backed
notes with maturities ranging from 1999 to 2005. Borrowings under the asset
backed notes are secured by eligible vehicle collateral and bear interest at
fixed rates on $1.1 billion ranging from 6.25% to 6.80% and floating rates on
$127 million ranging from LIBOR plus .70% to LIBOR plus 1.25%. Proceeds from the
asset backed notes that are temporarily unutilized for financing vehicles and
certain related receivables are maintained in restricted cash and investment
accounts, which were approximately $62.3 million at December 31, 1998.
OTHER VEHICLE DEBT
Thrifty has financed its Canadian vehicle fleet under a lease agreement
with an unrelated auto leasing trust providing for CND$125 million
(approximately US$82 million) of funding, which is supported by underlying bank
financing that is required to be renewed annually. On February 18, 1999, Thrifty
established new arrangements for its Canadian vehicle financing through a
five-year fleet securitization program. Under this program, Thrifty can borrow
up to CND$150 million (approximately US$109 million) funded through a bank
commercial paper conduit. The previous facility will be phased out as the
vehicles financed thereunder are taken out of service.
COMMERCIAL PAPER PROGRAM AND LIQUIDITY FACILITY
The Company established the commercial paper program on March 4, 1998 of
up to $615 million (the "Commercial Paper Program") and concurrently,
established a 364 day, $545 million liquidity facility to support the Commercial
Paper Program (the "Liquidity Facility"). Borrowings under the Commercial Paper
Program are secured by eligible vehicle collateral and bear interest based on
market-dictated commercial paper rates. At December 31, 1998, the Group had
$80.2 million in commercial paper outstanding under the Commercial Paper